This week, the spread between the 3-year U.S. Treasury note and the 5-year note (3s5s curve) “inverted”, with 5-year yields below 3-year yields. Does an inversion of this part of the yield curve predict a looming recession? Using daily data, the 3s5s curve has inverted 172 times since 1962! Smoothing through the daily volatility and using the monthly average of daily curve values, the 3s5s curve has inverted 15 times over the same period. How many recessions followed? Just seven downturns. Worse, on average, from the first inversion of the 3s5s curve to the start of a recession, 26 months had elapsed. A long-leading indicator with a spotty track record, at best. So if you are following the 3s5s curve as your guide to investment strategy, just…. don’t.
Source: Payden&Rygel, Bloomberg, NBER
